Boards Can Drive Science-Based and Risk-Aware Climate Lobbying

Amid the many shocks rocking our society and economy right now, directors may have missed some disturbing new research. In July, the World Meteorological Organization estimated that that the Earth’s average temperature could rise to 1.5-degrees Celsius above pre-industrial levels—considered the tipping point for the planet’s climate—during at least one of the years between now and 2024. This is years ahead of previous projections.

Climate risk is taking on entirely new significance. Accepted as a financial risk, understood to be a material risk, there’s an increasing consensus among central banks and other financial regulators that climate change is now also a systemic risk.

Why should boards and corporations care about this? When a risk is systemic, it affects the very stability of financial markets and there is no avenue to diversify from this risk. The current pandemic offers a useful analogy. Climate change could have such wide-ranging and compounding effects that everyone participating in global financial markets will be impacted.

Given this understanding and the rapidly shrinking window to act, a new Ceres report calls for all corporate action, including lobbying, to take into account the systemic risk of the climate crisis and therefore be aligned with the latest climate science. It calls for “risk-aware” climate lobbying. It asks the following questions: Does your lobbying, especially on climate change, fully consider the risks that global warming poses for your business? And is any of that lobbying actually contributing to creating more risk for your company or industry?

Investors are particularly conscious of how this disconnect between climate science and climate lobbying could create an investment risk.

In 2018, institutional investors with $2 trillion in assets under management called on the 55 top greenhouse gas-emitting European companies to “ensure any engagement conducted on their behalf or with their support is aligned with our interest in a safe climate.” As a result of this investor focus, Royal Dutch Shell, BP, and Total have conducted assessments on the extent to which their large trade association memberships align with their positions on climate change. Building on the success in Europe, in 2019, 200 institutional investors with a combined $6.5 trillion in investments asked 47 of the largest US publicly traded corporations to specifically align their climate lobbying with Paris Agreement goals.

But investors aren’t just asking—they’re acting. In a big win, 53 percent of shareholders at Chevron Corp. voted this summer for a resolution that would push the oil firm to ensure its lobbying activities around climate issues align with the Paris Agreement. This marks the first time a climate proposal won a majority of the company’s shareholder votes. Other climate-related lobbying proposals won support elsewhere this proxy season—at Duke Energy Corp. with 42.4 percent in favor, Exxon Mobil Corp. with 37.5 percent, Caterpillar with 34 percent, General Motors Co. with 33 percent, Delta Air Lines with 45.9 percent, and United Airlines with 31.4 percent.

What role can boards play in helping the companies they serve better align their lobbying activities with climate risk? Directors can do the following:

Assess. Understand your company’s risk management efforts on climate change, including whether and how climate change is assessed as part of enterprise-risk management. Boards could ask management whether that assessment considers the latest climate science and the evolving notion of climate change as a systemic risk. Companies are already starting to conduct climate change-scenario assessments, which could be a great avenue for integrating such thinking.

As a part of this, boards could also encourage management to assess whether their direct and indirect lobbying is aligned with the latest climate science. Ceres calls on companies to use “science-based climate lobbying”—or policies that align with the latest climate science—as the new north star and identifies a number of resources that provide updated details on what this could involve. These assessments should encompass direct lobbying and indirect lobbying done through trade associations.

Govern. Boards should look to see if their companies have the right systems in place to ensure that risk monitoring, sustainability, and government relations are cross-functional and collaborative, particularly in relation to climate lobbying. Boards should also engage management in conversations about how decisions around climate lobbying have the potential to mitigate or exacerbate the risks that a company faces.

Encourage action. Finally, boards should encourage management to act. These actions could include providing disclosures that affirm climate science and directly lobbying on policies that support climate science. Management should be encouraged to engage major trade associations on their own climate lobbying with a view to ensuring that these efforts are also aligned with climate science.

The pandemic shows us the critical value of leadership that combines a clear-eyed assessment of risks with the understanding of the very latest science. It is time to apply this lesson to climate lobbying.

Veena Ramani is the senior program director of Capital Market Systems at Ceres. She leads Ceres’ work on board governance.

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NACD: Tools and resources to help guide you in unpredictable times.

A View from the Front Line: Boards Need Agility Now

The ability of organizations to survive periods of tremendous upheaval lies not in their relative size, strength of their balance sheet, or competitiveness as determined by their current market definitions. Rather, it is the ability and willingness of a business to adapt its current governance protocols and processes while at the same time building on its core governance structures and responsibilities that truly differentiates those firms that emerge successfully from a crisis from those that struggle or fail. Using the COVID-19 pandemic as a lens through which to explore this perspective, firms may consider adapting their governance models using the following series of opportunities and their implications.

If you thought the onslaught of COVID-19 happened quickly, think about this: The world will never be slower than it is today. Implication: The speed and resiliency of a company’s governance structure and business model to adapt is more important than ever.

Environmental, social, and governance (ESG) issues are now table stakes for a firm’s long-term sustainability. The rise of stakeholder capitalism over shareholder capitalism is real and ties back to the critical fact that a firm needs social license to operate—not just a business license. Things that governments used to do, such as act as stewards of the environment, provide health care for the vulnerable, or combat homelessness and racism, now need to be part of enterprises’ ESG mandate. Failure to align the business with ESG goals will result in other consequences. Implication: Successful boards have the resolve to intervene to ensure that progress is made toward meaningful and clear ESG metrics. If this is not a priority, some firms may very well not be able to retain their best employees, attract top directors, or maintain their ability to finance the business.

Similar to adopting the International Organization for Standardization’s safety standards, boards and companies will evolve to adapt to virus-sensitive protocols around how they conduct business and governance operations. If some board meetings are digital, it reduces the board’s physical exposure and travel footprint in a material way. Implication: COVID-19 is not a temporary phenomenon. We now live in a world where learning how to govern and operate safely despite the presence of dangerous, contagious viruses is essential to ongoing business viability and an opportunity to differentiate a company’s value to stakeholders, all while reducing risk.

From a risk and opportunity assessment perspective, customer relationship management systems (CRMs) need to place more emphasis on global issues and their ties to local operations. Implication: Companies that have evolved their ability to become preemptive in their actions due to “over the horizon CRM-ESG radar systems,’ will stay ahead of trends instead of struggling to catch up.

The business strategy and balance sheet must through all phases of the business cycle be disciplined enough to invest in new growth. With the narcotic of low interest rates and an unprecedentedly long bull market, many firms’ business models have been exposed as they were only viable under then-current market assumptions. Implication: Directors need to be healthy skeptics and ask the question: Is our strategy designed to excel under current conditions or can it also propel us to create or enter new markets so that when change occurs, we are less dependent on our current paradigm?

Governance processes (not responsibilities) need to adapt to the times they are in. Implication: Governance is not passive. The board has a responsibility to stay engaged, especially during unprecedented periods like this, and needs to find the right balance between “nose in” and “fingers out.” Some options to consider include the following:
Shift to short monthly meetings instead of quarterly meetings (if you haven’t already).
 Meet virtually with directors the evening before board meetings to regain some of the social interaction that is lost absent in-person dinners and on-site gatherings.
Stay out of management’s way of running the firm if the business continuity protocols are working.
Offer shareholders, proxy advisors, and credit-rating agencies digital access to the board instead of traditional face-to-face meetings.

Business life is not going back to the way it was. Take advantage of the opportunities volatility can create to accelerate innovation. Implication: Fight the tendency to have the organization snap back to the way it was. Lock in the innovations, cost reductions, and process improvements that management has achieved through this period of upheaval.

Executive and board compensation must be aligned with stakeholder interests. In volatile times it is prudent to forego any sort of immediate compensation adjustments unless they are absolutely necessary. Implication: Whatever the compensation treatment may be, it better align with how shareholders, employees, customers, and other key stakeholders experienced this event. The board’s ability to apply discretion while conveying trust and thanks to management and front-liners is especially important at this time.

A diverse and seasoned board of directors is valuable. Directors who have governed through major disruptions such as catastrophic weather events, technology upheavals, financial meltdowns, and so forth are the ones you want on your board all the time, not just in adversity. The board should also seek out not only diversity in decision-making experience but in gender, age, race, and ethnicity to minimize myopic decisions. When recruiting directors, ask them to share something from their leadership experience that went truly awry and what, from a governance perspective, they learned. Implication: We all are good captains in fair weather, but the storms truly bring out the best of leadership in both boards and management.

The secret sauce that makes a firm’s strategy resilient is the quality of leadership at the CEO and board level, coupled with clear and timely communications to stakeholders. The CEO is the linchpin that connects the board to management and sometimes the chair with the board. Implication: Absent leadership and effective communications, this can all be for naught.

Don Lowry is chair of Capital Power Corp., a Canadian power-generating enterprise committed to environmental stewardship. He previously held various C-suite and board-level positions at the likes of EPCOR Utilities, Hydrogenics Corp., Stantec, and more.

NACD’s Summit 2020 is going virtual with complimentary access to select programming included with your membership.

Register today for your free ticket.

NACD: Tools and resources to help guide you in unpredictable times.

The Leading Advantage: Leadership Agility in Latin America

Hosted by Robert Newland, CEO of Newland Associates, a CPI Firm, this is our first Spanish language episode.  Claudia Rosales of CPI Peru joins the show to discuss leadership agility and team engagement in times of change and uncertainty.
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